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When is disclosure not enough in CFA Ethics?
Ask what the problem is. Disclosure helps clients and employers evaluate conflicts, but it does not cure every issue. If the issue is a conflict of interest, full and fair disclosure may be part of the fix. If the issue is outside compensation that could affect independence or loyalty, consent may be required. If the issue is material nonpublic information, disclosure to a client is not a green light to trade; the member should avoid acting on the information and follow compliance procedures. The shorthand is: - Conflict: disclose clearly. - Outside compensation or competing duty: look for consent. -
What should I review after missing a CFA Ethics question?
Tag the reason you missed it. A useful Ethics error log should say more than "review Ethics." Use categories like these: - Wrong actor: you analyzed the supervisor when the question tested the analyst. - Wrong duty: you treated a fair dealing issue as a suitability issue. - Disclosure shortcut: you assumed disclosure cured a situation that required consent or abstention. - Overbroad remedy: you chose the harshest answer even though the Standard required a narrower fix. - Result bias: you judged the outcome instead of the conduct. Once you know the error type, review the relevant Standard and redo
Why do CFA Ethics questions feel different from just reading the Standards?
Yes. Treat each Ethics question as an application problem, not a reading-comprehension recall problem. Start with the facts. Identify the tested actor, the duty, and the action required. Then read the answer choices for the one that matches the duty without overcorrecting. For example, if a manager gives a recommendation to high-fee clients first, the issue is not whether the recommendation is profitable. The issue is fair dealing. If an analyst repeats a private contract rumor before public release, the issue is not whether the analyst is diligent. The issue may be material nonpublic information.
What happens to alpha analysis if the benchmark is invalid?
Be careful. Alpha is measured relative to a benchmark or risk model. If the benchmark is invalid, positive alpha may not mean manager skill. It may mean the benchmark was too easy, too risky, too conservative, or unrelated to the actual mandate. Suppose a low-volatility equity manager earns `7.2%` while a high-beta growth benchmark earns `5.8%` during a defensive market. The `1.4%` excess return does not automatically prove skill because the benchmark may not reflect the strategy's risk profile. In an exam answer, first state that the benchmark is not valid. Then explain why performance metrics based on that benchmark
Why does a benchmark need to be investable if it is only used for comparison?
Investability matters because a benchmark should represent a realistic passive alternative to the active strategy. If the benchmark cannot be held, replicated, or accessed under realistic conditions, it may not be a fair opportunity-cost comparison. For example, a private-asset benchmark built from stale appraisals may be measurable, but it may not represent an investable portfolio with current transaction prices. Similarly, a benchmark containing securities outside the manager's legal or policy constraints can make the manager look too risky or too conservative for reasons unrelated to skill. Measurable answers whether the return can be computed. Investable answers whether the comparison is
How do I spot a style-mismatched benchmark in a manager evaluation vignette?
Start with the mandate, not the index name. A benchmark can be published, measurable, and familiar but still inappropriate if it does not reflect the manager's investment universe, style, risk constraints, or currency exposure. Look for mismatches such as: - small-cap manager versus broad large-cap index, - short-duration credit mandate versus long-duration aggregate bond index, - domestic portfolio versus global benchmark, - value strategy versus growth benchmark, - hedged mandate versus unhedged currency benchmark. If the benchmark has different risk exposures, tracking error and alpha may be measuring benchmark mismatch rather than manager skill.
Why does a CFA benchmark need to be specified before the performance period?
Because benchmark timing protects the evaluation from hindsight. If the benchmark is chosen after the result is known, the evaluator can unintentionally select the comparison that makes the manager look best or worst. A valid benchmark should be documented before the evaluation period so the manager knows the assignment and the client knows the yardstick. Then excess return, tracking error, and information ratio have a stable reference point. Example: if a small-cap value manager is assigned the **North Harbor Small Value Index** on January 1, year-end excess return is meaningful. If the manager waits until December 31 and chooses whichever
What should I check first when a regression table seems to pair a strong t-statistic with an insignificant p-value?
Check the row alignment first. Regression tables often show several coefficients, standard errors, t-statistics, and p-values. A strong t-statistic for one coefficient can sit near a high p-value for another coefficient. Then check the test direction and tail convention. For a two-tailed coefficient test, a large absolute t-statistic should generally mean a low p-value. If that is not true, the p-value may be from a different row, the question may be using a one-tailed alternative in the opposite direction, or the statistic may not be a t-statistic for that coefficient. Exam decision rule:
Is the p-value the probability that the null hypothesis is true?
No. A p-value is conditional on the null hypothesis being true. It asks how unusual the observed test statistic would be under that assumption. A better exam-safe phrasing is: So a p-value of 0.03 does not mean there is a 3 percent probability that H0 is true. It means the observed evidence would be unusual under H0. If alpha is 5 percent, the analyst rejects H0 because `0.03 <= 0.05`.
How does the choice between a one-tailed and two-tailed test change the p-value for a t-statistic?
A two-tailed test looks for results at least as extreme in either direction. A one-tailed test looks only in the direction stated by the alternative hypothesis. For example, if a positive t-statistic is evidence for the stated alternative, the one-tailed p-value is usually about half the two-tailed p-value. If the alternative is in the opposite direction, the one-tailed p-value will be large because the statistic points the wrong way. The key CFA habit is to read the alternative before interpreting the p-value: Do not reject just because the absolute statistic looks big. Compare the correct p-value with alpha.
If a CFA example shows a large t-statistic and a high p-value, should I reject the null hypothesis?
Not automatically. For the same test, same distribution, same degrees of freedom, and same tail convention, a larger absolute t-statistic should correspond to a smaller p-value. If the t-statistic looks large but the p-value is high, first check whether you are reading the same row, the same coefficient, and the correct tail. Use this sequence: If the p-value is high and correctly matched, you fail to reject the null. A common reason for the apparent mismatch is that the p-value belongs to a different coefficient or that a one-tailed test is being evaluated in the opposite direction.
How do I use put-call parity as a replication map?
Use put-call parity by comparing two packages that produce the same expiration payoff: - `Call + PV(strike)` - `Put + Stock` If both packages cost the same today, parity holds and there is no arbitrage. If one side is cheaper, the cheaper package can be bought and the more expensive package sold, assuming the exam setup allows the usual no-arbitrage assumptions. The fastest way to avoid confusion is to label the sides as payoff packages rather than memorizing the formula as isolated symbols.
When does a pricing difference become arbitrage?
A pricing difference becomes arbitrage when two positions have the same future payoff but different current prices, allowing a trader to buy the cheaper position and sell the expensive one. The payoff match is the key. If the two positions are merely similar, the trade may be relative value, hedging, or speculation, but not clean arbitrage. In CFA questions, look for language such as same expiration, same strike, same underlying, borrowing or lending at the risk-free rate, and future cash flows that offset. After that, include financing. A price gap that disappears once cash flows are discounted or compounded is
How does replication help price a derivative?
Replication prices a derivative by matching its future payoff with a portfolio whose current cost can be observed or computed. Suppose a derivative and a portfolio have the same payoff in every relevant future state. If markets are arbitrage-free, those two positions should have the same value today after financing is handled correctly. If the derivative trades above the replication cost, it looks expensive. If it trades below the replication cost, it looks cheap. The replication portfolio is not merely a shortcut. It is the reason the fair price exists.
What is the difference between replication and arbitrage?
Replication means building one position that has the same payoff as another position. Arbitrage means exploiting a price difference between equivalent payoffs. That means replication can exist without arbitrage. If a derivative costs exactly the same as its replication portfolio, the relationship is fair under no-arbitrage pricing. There is no free profit; there is just a pricing check. Arbitrage appears only when the market price and replication cost differ enough to let you buy the cheaper exposure and sell the expensive exposure while locking in the difference.
How do I read moneyness inside a bull call spread?
A bull call spread buys a lower-strike call and sells a higher-strike call. Then you compare the current stock price with each strike. If the stock is `54`, the long `50` call is in the money and the short `60` call is out of the money. If the stock is `48`, both calls are out of the money. If the stock is `63`, both calls are in the money. The strategy remains a bull call spread in all three cases because the structure is long the lower-strike call and short the higher-strike call. Moneyness changes with the relationship between `S`
Why are strangles often built with out-of-the-money options?
A long strangle usually buys a lower-strike put and a higher-strike call. If the current stock price sits between those strikes, both options are out of the money. That setup lowers the initial premium compared with buying an otherwise similar at-the-money straddle. The tradeoff is that the stock must move farther before either option has intrinsic value at expiration. For CFA questions, the rule is still leg by leg: the lower-strike put is out of the money when the stock is above that strike, and the higher-strike call is out of the money when the stock is below that strike.
Is a straddle always at the money?
No. A straddle uses a call and a put with the same strike and expiration. It is often introduced as an at-the-money strategy, but it is at the money only if the shared strike is close to the current stock price. If the stock is `80` and both options have strike `80`, both legs are at the money. If the stock is `80` and both options have strike `85`, the call is out of the money and the put is in the money. So the straddle label tells you the structure. The stock price and strike tell you moneyness.
How do I classify moneyness inside an option strategy?
Classify each option leg separately. Do not label the whole strategy as in the money or out of the money. For a call, compare the stock price with the strike: the call is in the money when `S > K`, at the money when `S` is close to `K`, and out of the money when `S < K`. For a put, reverse the direction: the put is in the money when `S < K`, at the money when `S` is close to `K`, and out of the money when `S > K`. After every leg is classified, use the strategy
How do coupons change Macaulay duration?
Coupons change Macaulay duration because they change when the investor receives value. Higher coupons move more present value into earlier payment dates, which usually shortens Macaulay duration. Lower coupons leave more value concentrated near maturity, which usually lengthens Macaulay duration. That is why a zero-coupon bond has Macaulay duration equal to maturity, while an otherwise similar coupon bond usually has a shorter Macaulay duration.
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